Question

A solution to the moral hazard problem relating to marriages is

1)marryfor love

2)the threat of reciprocation

3) sign a pre-nuptial agreement

4)get a tattoo with your suitor’s name on it

5)give additional marital gifts to increase net surplus

Which of the following is not specifically an example of economies of scale at work in a marriage?

1)use cash wedding gifts towards first home purchase

2) sell off the two closet stand-up vacuum cleaners and buy a top-of-the-line dyson

3) get a Costco membership to get discounts for bulk

4) move in together and sell our extra furniture on CraigsList

q) Your manager arrives at the store late and you are behind the sales counter, but nothing has been sold in their absence. You have been late before and so the manager wonders if you are being truthful when you claim that the zero sales are because no customers came in. Describe the type of problem your manager is facing.

Answer 1

1. 3) sign a pre-nuptial agreement

Due to moral hazard problem in marriage, couples can start taking each other for granted. Signing a pre nupital agreement can be a viable solution as it acts as a disincentive to divorce.

2. 1) use cash wedding gifts towards first home purchase.

Economies of scale refers to how bulk production can reduce costs. Option b, c and d represent lower costs due to moving in as a couple.

3. The manager is facing the problem of moral hazard. Moral hazard arises when we cannot costlessly observe people's actions and so cannot judge (without costly monitoring) whether a poor outcome reflects poor fortune or poor effort. Since the manager can not be certain that zero sales were a result of no customers coming in or me being late, he is facing the problem of moral hazard.